Moderating effect of IFRS adoption on accounting conservatism and cost of equity: evidence from Canadian ESG data

Abstract

Purpose

The purpose of this paper is to examine the moderating effect of International Financial Reporting Standards (IFRS) adoption on the relationship between accounting conservatism and the cost of equity in Canadian environmental, social, and corporate governance (ESG) firms.

Design/methodology/approach

Panel data was collected using the Thomson Reuters ASSET4 database on a sample of 284 Canadian ESG companies over the period 2007–2019.

Findings

The results obtained show a negative relationship between conditional conservatism and the cost of equity. The authors also find a negative relationship between unconditional conservatism and the cost of equity. In addition, IFRS adoption moderates the relationship between accounting conservatism and the cost of equity in Canadian ESG firms.

Research limitations/implications

Future studies may extend the coverage of the study by including other countries and other sectors.

Practical implications

The results imply that prudent accounting signals information to investors about the quality of a company’s current and future earnings. The rates of return required by investors may be higher for conservative reporting companies that are more susceptible to opportunistic management discretion.

Originality/value

Although the previous literature has studied the direct correlation between accounting conservatism and the cost of equity, the present work focuses on examining the direct association between accounting conservatism and the cost of equity through the moderator effect of IFRS, which has not been widely used in studies of accounting conservatism until now.

Citation

Chouaibi, Y. and Belhouchet, S. (2023), "Moderating effect of IFRS adoption on accounting conservatism and cost of equity: evidence from Canadian ESG data", Journal of Global Responsibility, Vol. 14 No. 4, pp. 492-515. https://doi.org/10.1108/JGR-09-2022-0086